Korn/Ferry International 10-Q Summary
Business context and reporting period
Form 10-Q for the three and nine months ended January 31, 2017, representing fiscal 2017 third quarter. Korn/Ferry provides executive search, Hay Group advisory and organizational services, and Futurestep recruitment process outsourcing, professional search, and consulting services through 128 offices in 52 countries.
The results reflect the December 2015 Legacy Hay acquisition, which materially increased Hay Group revenue and expenses. Mexico was consolidated beginning in the fourth quarter of fiscal 2016, resulting in noncontrolling interest in the current-period results.
Financial performance and position
| Metric | Three months ended January 31, 2017 | Prior comparable period | Nine months ended January 31, 2017 | Prior comparable period |
|---|---|---|---|---|
| Fee revenue | $381.9 million | $344.2 million | $1,159.5 million | $892.2 million |
| Total revenue | $394.2 million | $358.9 million | $1,202.1 million | $929.6 million |
| Operating income (loss) | $30.5 million | $(14.1) million | $81.6 million | $47.9 million |
| Net income attributable to Korn/Ferry | $23.9 million | $(16.0) million | $57.3 million | $25.1 million |
| Diluted EPS | $0.42 | $(0.30) | $1.00 | $0.48 |
| Adjusted EBITDA | $55.3 million | $47.7 million | $174.9 million | $135.4 million |
- Fee revenue increased 11% in the quarter and 30% for the nine-month period. Hay Group was the principal growth driver, with quarterly fee revenue up 25% to $175.7 million and nine-month fee revenue up to $539.1 million from $283.4 million.
- Executive Search fee revenue declined 1% in the quarter and 2% for the nine-month period. Futurestep fee revenue increased 9% in the quarter and 13% for the nine-month period.
- Quarterly operating margin was 8.0% of fee revenue versus negative 4.1% in the prior-year quarter. Nine-month operating margin was 7.0% versus 5.4%.
- Quarterly net margin attributable to Korn/Ferry was 6.3% of fee revenue versus negative 4.6%; nine-month net margin was 4.9% versus 2.8%.
- Quarterly Adjusted EBITDA margin was 14.5% of fee revenue, compared with 13.6% on reported prior-period fee revenue; management reported approximately 14% on adjusted fee revenue in both periods. Nine-month Adjusted EBITDA margin was approximately 15% in both periods.
- Cash flow from operations was $13.7 million for the nine months, compared with cash used of $17.4 million in the prior-year period. Capital expenditures were $41.6 million, compared with $17.7 million.
- Cash and cash equivalents were $351.3 million at January 31, 2017, compared with $273.3 million at April 30, 2016. Cash, cash equivalents, and marketable securities totaled $466.7 million, compared with $414.7 million.
- Working capital increased $178.8 million to $366.8 million. Client receivable days increased from 55 at April 30, 2016 to 70 at January 31, 2017.
- The term loan balance was $264.7 million at January 31, 2017, compared with $140.0 million under the prior facility at April 30, 2016. The company had no revolver borrowings. The new $400 million credit agreement matures June 15, 2021.
- Quarterly dividends remained $0.10 per share. The company repurchased $16.3 million of common stock during the nine months, leaving approximately $133.7 million available under the repurchase authorization.
Material changes versus the prior comparable period
- The Legacy Hay acquisition drove most of the year-over-year increase in revenue, particularly consulting and productized-services revenue, and expanded Hay Group’s quarterly operating results from a $21.6 million loss to $16.0 million of income.
- Executive Search profitability weakened: quarterly operating margin fell to 19.2% from 22.4%, and Adjusted EBITDA margin fell to 21.3% from 27.7%, primarily because of lower North American revenue and higher compensation and administrative costs.
- Restructuring charges declined to $3.8 million in the quarter from $30.6 million and to $28.3 million for the nine months from $30.6 million. Current-year charges primarily related to office consolidation; prior-year charges were primarily severance.
- Other income improved to $4.2 million in the quarter and $7.6 million for the nine months, compared with losses of $7.1 million and $9.8 million, respectively, primarily because of gains in marketable securities held for deferred compensation obligations.
- Interest expense increased to $2.4 million for the quarter and $8.2 million for the nine months, compared with $0.4 million and $1.2 million, respectively, because of the new term loan.
- Foreign currency translation losses increased accumulated other comprehensive loss to $76.1 million from $57.9 million at April 30, 2016. Management estimated that a 10% currency movement could produce an approximately $11.0 million foreign-exchange gain or loss.
Outlook, commentary, risks, and unusual items
The filing does not provide numerical earnings or revenue guidance. Management stated that cash on hand, operating funds, and available credit are expected to cover working capital, capital expenditures, debt repayment, Legacy Hay retention-pool obligations, dividends, and anticipated corporate requirements for the next twelve months.
- The Legacy Hay integration and restructuring plan remained in progress. The restructuring liability was $12.6 million at January 31, 2017, and the acquisition includes a retention pool commitment of up to $40 million, with future payments scheduled primarily after November 30, 2017 and November 30, 2018.
- Debt covenants require, among other conditions, a maximum pro forma leverage ratio of 2.50 to 1.00 and minimum domestic liquidity of $50 million for permitted acquisitions, dividends, and share repurchases. The company reported compliance at January 31, 2017.
- Key risks include economic and labor-market weakness, demand volatility and seasonality, consultant retention and utilization, competition, client-relationship portability, foreign currency and interest-rate movements, cybersecurity and systems dependence, legal and regulatory exposure, acquisition integration, goodwill and intangible-asset impairment, deferred-tax-asset realization, and changes in accounting estimates.
- The company reported no material litigation expected to have a material adverse effect, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Deferred revenue was $99.7 million at January 31, 2017. Marketable securities held in trust for deferred compensation obligations had a fair value of $115.4 million against vested and unvested obligations totaling $135.6 million.
- A March 6, 2017 dividend declaration authorized a $0.10-per-share payment scheduled for April 14, 2017, subject to the Board’s continuing discretion.
Important facts for investors to verify
- Assess the sustainability of revenue growth after normalizing for the Legacy Hay acquisition and consolidation effects.
- Monitor Executive Search revenue, engagement volumes, average fees, compensation ratios, and margin recovery.
- Verify the remaining cost, timing, and cash impact of Hay Group integration, restructuring, retention-pool, and office-consolidation obligations.
- Reconcile cash and marketable securities held for deferred compensation with the related vested and unvested obligations.
- Track term-loan amortization, variable-rate exposure, leverage-covenant headroom, and the company’s ability to continue dividends and share repurchases.
- Evaluate receivables growth and the increase in days sales outstanding from 55 to 70 days.
- Distinguish GAAP results from Adjusted EBITDA and other non-GAAP measures, including the impact of securities-market gains and acquisition-related adjustments.